$1B Gulf deal with Exxon boosts Houston firm's profile

$1B Gulf deal with Exxon raises young firm's profile

BRETT CLANTON, HOUSTON CHRONICLE |
November 21, 2010

Energy XXI will pay Exxon Mobil Corp. $1 billion for a swath of shallow-water fields in the Gulf of Mexico, in a deal that significantly boosts both the output and profile of the young, independent oil and gas company.

With the all-cash transaction, Energy XXI's production will jump by 77 percent, making the company one of the top oil and natural gas producers in the region, just five years after it formed.

The deal shows that some producers still see opportunity in a heavily drilled area of the Gulf, even as major oil companies exit to focus on larger plays.

"We're very comfortable staying in the Gulf of Mexico and taking advantage of the fact that others want to leave," Energy XXI Chairman and CEO John Schiller said in an interview.

The Energy XXI acquisition is the latest in a string of big asset sales in the Gulf's shallow waters, which generally refers to fields in 500 feet of water or less.

In April, Apache Corp. agreed to pay $1.1 billion for Devon Energy Corp.'s oil and natural gas assets in the region, while McMoRan Exploration Co. struck an $818 million deal in September to buy shallow-water properties from Plains Exploration & Production Co.

The churn comes as major oil companies including BP and Shell turn their attention to deep-water fields around the globe that require massive investments but also offer much bigger rewards. That shift has created an opening for smaller players with lower operating costs, like Energy XXI, that can still turn profits in shallow-water fields.

Schiller said the Exxon Mobil properties were especially attractive because the production and proven reserves are weighted toward crude oil instead of less valuable natural gas.

Exxon Mobil officials released a statement confirming the sale of "several producing assets in the Gulf of Mexico, associated pipeline infrastructure and onshore facilities." They said the transaction should be complete by the end of the year.

Nine fields in Gulf

The properties include nine fields off the coasts of Louisiana and Alabama, which sit between existing operating areas for Energy XXI called the Main Pass and South Timbalier.

The fields will add 20,000 barrels of oil equivalent per day to Energy XXI's production, bringing it to 46,000 barrels of oil equivalent per day, the company said. The proven and probable reserves are 66 million barrels of oil equivalent.

By comparison, Houston's Apache, the largest producer on the Gulf Shelf, expects to produce about 120,000 barrels of oil equivalent per day in the region in December, following its recent acquisition of Mariner Energy.

After the April 20 blowout at BP's Macondo well, regulators launched a six-month ban on deep-water drilling and issued tougher rules that have slowed the pace of new shallow-water wells.

But Schiller said delays have been more of an issue for producers drilling exploratory wells in lesser-known regions, and he's confident of his firm's ability to move forward with development plans.

Energy XXI, which is incorporated in Hamilton, Bermuda, but run from Houston, has grown through acquisitions since it formed in 2005.

In 2006, it agreed to acquire Marlin Energy for $407 million, following with a $312 million acquisition of offshore Louisiana properties from Castex.

In 2007, Energy XXI acquired Gulf shelf properties from Pogo for $417 million. And finally, in late 2009, it plunked down $283 million for assets owned by a unit of Japan's Mitsui & Co.

On the hunt for growth

Over that time, the company has grown to an enterprise value of $3 billion, 10 times its original size.

That's slightly below the $1-billion-a-year growth that Schiller said his management team had envisioned. But he noted the company is getting to the point where it could consider corporate mergers that could greatly increase its size in a single bite.

While there are no active plans for such a deal, Schiller hinted that Energy XXI will remain on the hunt for new growth opportunities.